David Blanchflower says : Inequality harms growth – but the Chancellor is going to deliver more of it - Independent 1st June

As women are poorer than men this is a gender issue...

The failure of economic forecasting continues to be a big problem, especially as we are about to be hit by another austerity Budget. Recall that forecast made by the Office for Budget Responsibility for the Budget of June 2010? The OBR forecast GDP growth averaging 2.8 per cent every year from 2011-2015; paying off of the deficit by 2015; wage growth of 4.4 per cent in 2014 and 2015. Plus exports were going to be making a major contribution to GDP growth in every year from 2011, and business investment was supposed to grow at double digits every year for years.

None of that happened, of course, and the UK lost its AAA credit rating and never got it back. Brilliant. I await with interest what the OBR forecast will be for the impact of Austerity Mark 2 (AM2) in the July Budget, and whether they learnt anything from their disastrous forecast when Austerity Mark 1 (AM1) was implemented. I doubt it.

This week the ONS estimated that investment grew, not at double-digit pace, but at 3.7 per cent from Q1 2014 to Q1 2015, and net trade continued to subtract from growth. The UK trade balance widened from £9.6bn in Q4 2014 to £13.2bn in Q1 2015, with exports falling by 0.3 per cent on the quarter, while imports rose by 2.3 per cent. The UK’s negative trade balance is now twice the size it was in 2011. Great.

Plus the second estimate of GDP that so many commentators just “knew” was going to be revised upwards wasn’t. Growth in Q1 2015 at 0.3 per cent was one third of the growth rate observed in Q1 2014, suggesting the economy has slowed sharply. In fact, services output was revised down. This included the Monetary Policy Committee, who in their most recent Inflation Report forecast that this quarter’s GDP would be revised up a lot. Plus almost all previous quarters going back through 2011. The MPC in their backcast have been saying that for ages and ages, with no sign of the data obeying their admonitions. The average revision to quarterly GDP over the last twenty years has been zero. And US GDP for Q1 2015 was revised down from plus 0.2 per cent to minus 0.7 per cent annualised on Friday. We just know all revisions are up.

The MPC has also been expecting a big take-off in private-sector wage settlements from the 2 per cent observed for the last couple of years, which of course hasn’t happened, and won’t. There has been no pick-up in wage settlements or wage growth. XpertHR reported that companies’ annual pay reviews are yielding a median pay award of 2 per cent, measured over the three months to the end of April 2015. The median pay award in both manufacturing and services was 2 per cent. This is the 13th month in a row they found that the median settlement was 2 per cent. XpertHR found that the middle half of pay awards were between 1.5 per cent and 2.4 per cent, with higher deals very rare: only 4.9 per cent of awards were above 3 per cent. Public-sector deals continue to lag, with the median at 1.6 per cent. Sheila Attwood, pay and benefits editor at XpertHR, commenting on the figures, argued that “employers continue to favour pay awards in the region of 2 per cent and we see no evidence of this changing over the remainder of the year”. The MPC once again seems to have lost the plot.

We should be mindful when we evaluate George Osborne’s AM2 Budget the impact it has on inequality and poverty, in light of an important study published this week by the OECD, who are not known for being squashy feely, entitled “In It Together: Why Less Inequality Benefits All”. Today, in OECD countries, the richest 10 per cent of the population earn 9.6 times the income of the poorest 10 per cent. In the 1980s, this ratio stood at 7:1, rising to 8:1 in the 1990s, and 9:1 in the 2000s. This rise in income inequality the OECD reported “tends to drag down GDP growth”. The rise of income inequality between 1985 and 2005, the OECD estimates, knocked 4.7 percentage points off cumulative growth between 1990 and 2010. The OECD argued that the long-run increase in income inequality does not only raise social and political but also economic concerns: and it is the rising distance of the lower 40 per cent from the rest of society which accounts for this effect.

As background, the chart, which uses data from this OECD study, makes clear that inequality, as measured by the Gini coefficient, is especially high in the UK. The coefficient is the measure of income inequality where 1 represents all wealth in the hands of one person and 0 signals completely even distribution. It also shows that inequality in the UK rose under the Coalition between 2011 and 2013, which is the latest data available, although it should be said that inequality in the UK is still less than it was in 2007. But the trend is up and inequality in the UK is the highest of any European nation.

Drawing on harmonised data covering the OECD countries over the past 30 years, the OECD explores whether income inequality has an impact on subsequent growth. The econometric analysis suggests that income inequality has a sizeable and statistically significant negative impact on growth. When income inequality rises, economic growth falls. The OECD also reports that redistribution through income taxes and cash benefits does not necessarily harm growth. It is inequality at the bottom of the income distribution that hampers growth. The OECD notes that “now top earners have a greater capacity to pay taxes than before, governments may consider re-examining their tax systems to ensure that wealthier individuals uphold their fair share of the tax burden”. Slasher won’t be pleased.

The OECD concludes that its analysis points to the importance of carefully assessing the potential consequences of pro-growth policies on inequality. This is the important bit for George Osborne: “Focusing exclusively on growth and assuming that its benefits will automatically trickle down to the different segments of the population may undermine growth in the long run inasmuch as inequality actually increases. On the other hand it indicates that policies that help limiting or – ideally – reversing the long-run rise in inequality would not only make societies less unfair, but also richer.” My concern is that AM2 will do exactly the opposite, as AM1 did: the UK will likely become more unequal and poorer. Rising inequality is bad for growth. Austerity raises inequality and lowers growth. But the OBR will probably say the opposite.